Exhibit 19
1st
FRANKLIN
FINANCIAL
CORPORATION
QUARTERLY
REPORT TO INVESTORS
FOR THE
SIX MONTHS ENDED
JUNE 30, 2000
MANAGEMENT'S LETTER
Financial Condition:
-------------------
Increases in investment securities held by the Company's insurance
subsidiaries was the primary factor responsible for the $3.9 million (2%)
growth in total assets during the six months ended June 30, 2000. Management
deposits surplus working capital generated from the credit insurance business
into investment securities in an attempt to maximize yields.
The decline in net receivables (gross receivables less unearned finance
charges) during the first quarter of 2000 was reversed during the quarter just
ended as loan originations rose enabling the Company to record a slight
increase in its net loan portfolio during the six month period ended June 30,
2000. As the year progresses, Management projects loan originations to
continue to rise following the cyclical pattern of previous years.
Cash and cash equivalents declined $1.3 million (23%) during the six
month period just ended as compared to the prior year-end mainly due to the
upswing in loan activity and investment activity and the funding requirements
associated therewith. Disbursement of the prior year's accrued incentive
bonus and the Company's annual contribution to the employee profit sharing
plan also contributed to the decrease in cash reserves. (These disbursements
also resulted in other liabilities decreasing $1.8 million or 13%.)
Results of Operations:
---------------------
Results of operations for the quarter ended June 30, 2000 closely
paralleled the performance for the six months just ended; therefore, the
discussion which follows will cover the six month period as a whole. The
discussion will not encompass a separate analysis of the quarterly
performance unless otherwise noted.
During the first half of 2000, the Company generated $39.1 million in
total revenues as compared to $34.5 million during the first half of 1999.
Although revenues were higher, net earnings were $0.4 million (18%) lower
during the quarter ended June 30, 2000 as compared to the same quarter in
1999 and $0.5 million (12%) lower for the six month comparable periods. The
decline in net income is due to higher loan losses and higher operating
expenses as described later in this discussion.
Net interest income (the difference between interest income on loans and
investments and interest expense on debt) rose $2.4 million (12%) during the
six months just ended as compared to the same period a year ago as a result
of higher levels of average net receivables outstanding. Average net
receivables grew to $175.5 million at June 30, 2000 as compared to $156.1
million at June 30, 1999. Recent increases in interest rates have not yet
had a material impact on net interest income. Interest expense increased
$0.3 million during the first half of 2000 mainly due to higher average debt
outstanding. Management, however, projects that the increase in interest
rates and the possibility of additional interest rate increases may result in
a more material impact on the net interest margin during the remainder of the
year.
Net insurance income increased $1.2 million (14%) during the six months
just ended as compared to the same period a year ago. Changes in insurance
earnings generally correspond to changes in the level of average net
receivables outstanding. As net receivables increase, the Company typically
sees an increase in customers requesting credit insurance, thereby leading to
higher levels of insurance in-force.
The Company owns a life insurance policy on one of its executive
officers. During the current year, the insurance company which wrote the
policy converted from a mutual company to a stock company. This conversion
resulted in ordinary income of approximately $0.1 million, which was the
primary cause of the $0.1 million (55%) increase in other revenues.
The Company's loan loss provision increased $0.6 million (20%) during the
current year as compared to the same six month period ended June 30, 1999 due
to higher net charge-offs. Net charge-offs rose $0.7 million (27%) during the
current year as compared to the first half of 1999. Delinquent accounts 60
days and more past due increased to 7.4% of net receivables at June 30, 2000
as compared to 6.6% at prior year-end. Rising delinquencies are a concern
and the Company intends to hire additional branch staff to concentrate on
collection of past due accounts. Management continually reviews its
delinquency position with respect to the total loan portfolio and believes it
uses the best information available in setting the loan loss reserve. Future
adjustments to the allowance for loan losses will be made when deemed
necessary by Managment.
Merit salary increases effective January 1, 2000 and increases in
accruals for incentive bonuses were factors responsible for the $2.6 million
(21%) increase in personnel expense. Medical claims incurred by the Company's
self-insured employee health plan rose significantly during the current year
which also added to the increase in personnel expense.
Eleven new branch offices have been opened since the quarter ended
June 30, 1999. The rent, utilities, telephone and maintenance associated
with these new offices caused occupancy expense to increase $0.3 million or
10% during the six months just ended.
Other operating expenses increased $0.7 million (15%) during the first
half of 2000 as compared to the first half of 1999. The increase was
primarily due to higher advertising expenditures, computer expenses,
insurance premiums, travel costs, stationary and supplies and various state
taxes and licenses.
Effective income tax rates were 20.0% and 15.7% for the quarters ended
June 30, 2000 and 1999 and 17.6% and 15.1% for the six months ended June 30,
2000 and 1999, respectively. Income taxes during the periods reflect only
the taxes of the Company's insurance subsidiaries which are not S corporations
for income tax reporting purposes. Federal and state income taxes generated
by the S corporation are paid by the shareholders, except in states which
do not recognize S corporation status. Certain tax benefits provided by law
to life insurance companies substantially reduce the life insurance
subsidiary's effective tax rate and thus decreases the Company's general tax
rate below statutory rates. Investments in tax exempt securities by the
Company'sproperty and casualty insurance subsidiary also decreases the
effective tax rate.
Market Risk:
-----------
There has been no material change in the Company's market risk since
December 31, 1999. Recent volatility in interest rates may, however, have a
negative impact on the Company's net interest margin during the remainder of
2000 if Management has to raise rates paid on its debt securities to remain
competitive in the market place
Liquidity:
---------
Liquidity requirements of the Company are financed through the
collection of receivables and through the issuance of public debt securities.
Continued liquidity of the Company is therefore dependent on the collection
of its receivables and the sale of debt securities that meet the investment
requirements of the public. In addition to the securities program, the
Company has two external sources of funds through the use of two Credit
Agreements. One agreement provides for available borrowing of $21.0 million.
Available borrowings were $18.3 million at June 30, 2000 and $20.0 at
December 31, 1999, relating to this agreement. Another agreement provides
for an additional $2.0 million for general operating purposes. Available
borrowings under this agreement were $2.0 million at June 30, 2000 and
December 31, 1999.
Year 2000 Readiness Disclosure:
------------------------------
The Company has not experienced any material malfunctions or errors in
its operations or business systems with regard to the Year 2000 issues
("Y2K"). Based on operations since January 1, 2000, Management does not
foresee any significant impact on its on-going business as a result of Y2K.
However, it is possible that the full impact of the date change, which was of
concern due to computer programs that use two digits instead of four digits
to define years, has not been fully recognized. Any problems which might
occur are expected to be minor and correctable. Management continues to
monitor applications of the Company and third party suppliers.
Expenses related to Year 2000 readiness during the six months just ended
were $9,033. No additional expenses are budgeted for the remainder of the
year.
Forward Looking Statements:
--------------------------
Certain information in the previous discussion and other statements
contained in the Quarterly Report which are not historical facts may be
forward-looking statements that involve risks and uncertainties. Actual
results, performance or achievements could differ materially from those
contemplated, expressed or implied by the forward-looking statements
contained herein. Possible factors which could cause future results to
differ from expectations are, but not limited to, adverse economic
conditions including the interest rate environment, federal and state
regulatory changes, unfavorable outcome of litigation, Year 2000 issues
and other factors referenced elsewhere.
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
2000 1999
------------ ------------
(Unaudited) (Audited)
ASSETS
CASH AND CASH EQUIVALENTS. . . . . . . . . . . . $ 4,581,119 $ 5,914,535
------------ ------------
LOANS, net . . . . . . . . . . . . . . . . . . . 156,781,695 156,124,333
------------ ------------
INVESTMENT SECURITIES:
Available for Sale, at fair market value. . . 51,900,266 47,127,780
Held to Maturity, at amortized cost . . . . . 6,216,934 6,734,286
------------ ------------
58,117,200 53,862,066
------------ ------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . 11,525,221 11,237,126
------------ ------------
TOTAL ASSETS. . . . . . . . . . . . . $231,005,235 $227,138,060
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
SENIOR DEBT. . . . . . . . . . . . . . . . . . . $114,337,767 $113,889,641
OTHER LIABILITIES. . . . . . . . . . . . . . . . 11,681,283 13,461,731
SUBORDINATED DEBT. . . . . . . . . . . . . . . . 37,769,102 35,246,639
------------ ------------
Total Liabilities . . . . . . . . . . . . 163,788,152 162,598,011
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock; $100 par value . . . . . . . -- --
Common Stock. . . . . . . . . . . . . . . . . 170,000 170,000
Accumulated Other Comprehensive Loss. . . . . (712,542) (780,772)
Retained Earnings . . . . . . . . . . . . . . 67,759,625 65,150,821
------------ ------------
Total Stockholders' Equity. . . . . . . . 67,217,083 64,540,049
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY. . . . . . $231,005,235 $227,138,060
============ ============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
(Unaudited) (Unaudited)
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME. . . . . . . . . . $13,488,553 $12,298,857 $27,024,779 $24,305,147
INTEREST EXPENSE . . . . . . . . . 2,429,103 2,231,021 4,749,154 4,417,617
----------- ----------- ----------- -----------
NET INTEREST INCOME. . . . . . . . 11,059,450 10,067,836 22,275,625 19,887,530
Provision for Loan Losses. . . . 2,160,809 1,912,668 3,474,600 2,886,478
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES. . . . 8,898,641 8,155,168 18,801,025 17,001,052
----------- ----------- ----------- -----------
NET INSURANCE INCOME . . . . . . . 4,661,364 4,106,082 9,278,008 8,117,354
----------- ----------- ----------- -----------
OTHER REVENUE. . . . . . . . . . . 269,432 128,735 405,639 262,529
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES:
Personnel Expense. . . . . . . . 7,230,932 5,912,703 14,664,824 12,081,668
Occupancy. . . . . . . . . . . . 1,511,728 1,379,205 3,025,328 2,747,374
Other. . . . . . . . . . . . . . 2,786,742 2,442,220 5,668,866 4,931,953
----------- ----------- ----------- -----------
Total. . . . . . . . . . . . . 11,529,402 9,734,128 23,359,018 19,760,995
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES . . . . 2,300,035 2,655,857 5,125,654 5,619,940
Provision for Income Taxes . . . 460,400 416,488 903,086 847,870
----------- ----------- ----------- -----------
NET INCOME . . . . . . . . . . . . 1,839,635 2,239,369 4,222,568 4,772,070
RETAINED EARNINGS, beginning
of period. . . . . . . . . . . . 67,032,990 63,170,069 65,150,821 60,637,368
Distributions on Common Stock. . 1,113,000 2,238,794 1,613,764 2,238,794
----------- ----------- ----------- -----------
RETAINED EARNINGS, end of period . $67,759,625 $63,170,644 $67,759,625 $63,170,644
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Voting Common Stock; 1,700
Shares outstanding
all periods. . . . . . . . . . $10.82 $13.17 $24.84 $28.07
====== ====== ====== ======
Non-Voting Common Stock;
168,300 Shares outstanding
all periods. . . . . . . . . . $10.82 $13.17 $24.84 $28.07
====== ====== ====== ======
</TABLE
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Six Months Ended
June 30
-------------------------
(Unaudited)
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . $ 4,222,568 $ 4,772,070
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for Loan Losses. . . . . . . . . . 3,474,600 2,886,478
Depreciation and Amortization. . . . . . . . 624,965 610,612
Deferred Income Taxes. . . . . . . . . . . . 130,852 75,905
Other, net . . . . . . . . . . . . . . . . . (63,086) 87,429
Increase in Miscellaneous assets . . . . . . (554,016) (477,596)
Decrease in Accounts Payable and
Accrued Expenses . . . . . . . . . . . . . (1,937,820) (1,266,700)
----------- -----------
Net Cash Provided. . . . . . . . . . . . 5,898,063 6,688,198
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans Originated or purchased. . . . . . . . . . (66,244,811) (61,719,130)
Loan Payments. . . . . . . . . . . . . . . . . . 62,112,849 55,127,886
Purchases of marketable debt securities. . . . . (6,188,092) (14,554,183)
Principal payments on securities . . . . . . . . 331,850 285,551
Sales of marketable securities . . . . . . . . . -- --
Redemptions of securities . . . . . . . . . . . 1,760,000 4,530,000
Other, net . . . . . . . . . . . . . . . . . . . (360,100) (441,007)
----------- -----------
Net Cash Used. . . . . . . . . . . . . . (8,588,304) (16,770,883)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Senior Debt. . . . . . . . . . . . . 448,126 10,702,825
Subordinated Debt Issued . . . . . . . . . . . . 5,167,053 3,373,178
Subordinated Debt redeemed . . . . . . . . . . . (2,644,590) (5,046,491)
Distributions Paid . . . . . . . . . . . . . . . (1,613,764) (2,238,794)
----------- -----------
Net Cash Provided. . . . . . . . . . . . 1,356,825 6,790,718
----------- -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . . (1,333,416) (3,291,967)
CASH AND CASH EQUIVALENTS, beginning . . . . . . . 5,914,535 20,111,678
----------- -----------
CASH AND CASH EQUIVALENTS, ending. . . . . . . . . $ 4,581,119 $16,819,711
=========== ===========
Cash Paid during the period for: Interest . . . . $ 4,518,142 $ 4,320,174
Income Taxes . . 937,250 914,743
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
-NOTES-
1. The accompanying interim financial information of 1st Franklin Financial
Corporation and subsidiaries (the Company) should be read in conjunction
with the annual financial statements and notes thereto as of December 31,
1999 and for the years then ended included in the Company's December 31,
1999 Annual Report.
2. In the opinion of Management of the Company, the accompanying
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the Company's
financial position as of June 30, 2000 and December 31, 1999 and the
results of its operations and its cash flows for the six months ended
June 2000 and 1999. While certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission, the Company believes that the disclosures herein are adequate
to make the information presented not misleading.
3. The results of operations for the six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the full fiscal
year.
4. The computation of Earnings per Share is self-evident from the
Consolidated Statement of Income and Retained Earnings.
5. In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". The Company had comprehensive income, which is comprised of net
income and unrealized gains or losses on securities held as available for
sale, of $2,025,930 and $1,523,119 for the quarters ended June 30, 2000
and 1999 and $4,290,798 and $3,833,973 for the six month comparable
periods, respectively.
6. The following tables summarize assets, revenues and profit by business
segment. A reconcilement to consolidated net income is also provided.
All segment revenues result from transactions with third parties. There
has been no differences from the 1999 Annual Report from the basis of
segmentation or the basis of measurement of segment profit.
Division Division Division
I II III Total
-------- -------- -------- --------
(In Thousands)
Segment Revenues:
Three Months ended 6/30/00. . $ 5,664 $ 5,906 $ 6,123 $ 17,693
Three Months ended 6/30/99. . 4,886 5,305 5,515 15,706
Six Months ended 6/30/00. . . 11,330 11,906 12,487 35,723
Six Months ended 6/30/99. . . 9,684 10,703 10,975 31,362
Segment Profit:
Three Months ended 6/30/00. . $ 2,103 $ 2,344 $ 1,446 $ 5,893
Three Months ended 6/30/99. . 1,771 2,129 1,701 5,601
Six Months ended 6/30/00. . . 4,161 4,908 3,359 12,428
Six Months ended 6/30/99. . . 3,489 4,410 3,462 11,361
Segment Assets:
6/30/00 . . . . . . . . . . . $ 91,475 $102,723 $40,836 $235,034
6/30/99 . . . . . . . . . . . 85,541 96,385 39,474 221,400
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
6/30/00 6/30/99 6/30/00 6/30/99
-------- -------- -------- --------
Reconcilement (In Thousands)
Profit:
Profit per segments . . . . $ 5,893 $ 5,601 $12,428 $ 11,361
Corporate earnings
not allocated . . . . . . 725 827 985 1,323
Corporate expenses
not allocated . . . . . . (4,318) (3,773) (8,287) (7,064)
Income taxes not
allocated . . . . . . . . (460) (416) (903) (848)
-------- -------- ------- --------
$ 1,840 $ 2,239 $ 4,223 $ 4,772
======== ======== ======= ========
BRANCH OPERATIONS
-----------------
Isabel Vickery Youngblood . . . . . . . Senior Vice President
A. Jarrell Coffee . . . . . . . . . . . Vice President
Jack R. Coker . . . . . . . . . . . . . Vice President
Robert J. Canfield. . . . . . . . . . . Area Vice President
J. Michael Culpepper. . . . . . . . . . Area Vice President
Ronald F. Morrow. . . . . . . . . . . . Area Vice President
</TABLE>
<TABLE>
<CAPTION>
SUPERVISORS
-----------
<S> <C> <C> <C>
Bryan Cook Bruce Hooper Dianne Moore Henrietta Reathford
Regina Bond Janice Hyde Harriet Moss Tami Settlemyer
Ronald Byerly Judy Landon Mike Olive Timothy Schmotz
Donald Carter Jeff Lee Melvin Osley Gaines Snow
Donald Floyd Tommy Lennon Dale Palmer Marc Thomas
Renee Hebert Mike Lyles Darryl Parker Jason Yates
Jack Hobgood Brian McSwain Hilda Phillips
OFFICES
-------
Alabama Offices: Georgia Offices: Georgia Offices: Louisiana Offices:
--------------- --------------- --------------- -----------------
Alexander City Buford Lawrenceville New Iberia
Andalusia Butler Madison Pineville
Arab Cairo Manchester
Athens Calhoun McDonough Mississippi Offices:
Bessemer Canton McRae -------------------
Birmingham Carrollton Milledgeville Bay St. Louis
Clanton Cartersville Monroe Carthage
Cullman Cedartown Montezuma Columbia
Decatur Chatsworth Monticello Grenada
Dothan Clarkesville Moultrie Gulfport
Enterprise Claxton Nashville Hattiesburg
Fayette Clayton Newnan Hazlehurst
Florence Cleveland Perry Jackson
Gadsden Cochran Pooler Kosciusko
Geneva Commerce Richmond Hill Magee
Hamilton Conyers Rome McComb
Huntsville Cordele Royston Pearl
Jasper Cornelia Sandersville Picayune
Madison Covington Savannah
Moulton Cumming Statesboro North Carolina Offices:
Muscle Shoals Dallas Swainsboro ----------------------
Opp Dalton Sylvania Monroe
Ozark Dawson Sylvester Pineville
Pelham Douglas Thomaston
Prattville Douglasville (2) Thomson South Carolina Offices:
Russellville (2) Eastman Tifton ----------------------
Scottsboro Elberton Toccoa Aiken
Selma Ellijay Valdosta (2) Anderson
Sylacauga Forsyth Vidalia Cayce
Troy Fort Valley Warner Robins Clemson
Tuscaloosa Gainesville Washington Columbia
Wetumka Garden City Waycross Conway
Georgetown Waynesboro Easley
Georgia Offices: Glennville Winder Florence
--------------- Greensboro Gaffney
Adel Griffin (2) Louisiana Offices: Greenville
Albany Hartwell ----------------- Greenwood
Alma Hawkinsville Alexandria Greer
Americus Hazlehurst Crowley Lancaster
Arlington Hinesville DeRidder Laurens
Athens (2) Hogansville Franklin Marion
Bainbridge Jackson Jena Newberry
Barnesville Jasper Lafayette Orangeburg
Baxley Jefferson Leesville Rock Hill
Blakely Jesup Marksville Seneca
Blue Ridge LaGrange Natchitoches Spartanburg
Bremen Lavonia Union
Brunswick York
</TABLE>
DIRECTORS
---------
Ben F. Cheek, III
Chairman and Chief Executive Officer
1st Franklin Financial Corporation
Lorene M. Cheek
Homemaker
Jack D. Stovall
President, Stovall Building Supplies, Inc.
Dr. Robert E. Thompson
Physician, Toccoa Clinic
EXECUTIVE OFFICERS
------------------
Ben F. Cheek, III
Chairman and Chief Executive Officer
T. Bruce Childs
President and Chief Operating Officer
A. Roger Guimond
Vice President and Chief Financial Officer
Lynn E. Cox
Secretary
Linda L. Sessa
Treasurer
LEGAL COUNSEL
-------------
Jones, Day, Reavis & Pogue
3500 Sun Trust Plaza
303 Peachtree Street, N.E.
Atlanta, Georgia 30308-3242
AUDITORS
--------
Arthur Andersen LLP
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
